TOKYO: The Japanese government bond yield curve steepened on Thursday as long-dated bond prices fell on hopes the IMF would provide Europe more assistance to combat the region's debt woes, while short maturities gained on the strong results of a five-year JGB auction.
Many market players expect JGBs to find solid support on the whole as investors remain worried about the stability of the euro zone, and as the European Central Bank's massive fund injection late last year is supporting both bonds and risk assets worldwide.
"You have about 50 trillion yen of money drifting in markets, looking for a destination. This is a mini liquidity-driven market," said a senior trader at a Japanese bank, referring to the ECB's three-year fund offer.
The five-year JGB yield slipped 1.0 basis point to 0.330 percent after the Finance Ministry's tender of 2.5 trillion yen five-year JGBs lived up to expectations of strong demand.
The auction's bid-to-cover ratio was 4.37, the highest since August 2010, while its tail was zero, with both the lowest and average prices at 99.84, for a yield of 0.333 percent, suggesting strong appetite for the paper.
"The auction confirms that investors have a decent appetite (for JGBs) due to large amounts of maturing bonds," said Katsutoshi Inadome, strategist at Mitsubishi UFJ Morgan Stanley.
Expectations that the Bank of Japan will have to keep rates near zero for the foreseeable future to bolster a sluggish economy are helping the five-year paper, traders also said.
The auction results helped the 10-year JGB futures -- which move in tandem with the cheapest-to-deliver seven-year sector, rather than the cash 10-year zone -- erase early losses and end essentially flat at 142.56, up 0.01 point on the day.
Longer maturities were undermined by the news that the International Monetary Fund wants to double its warchest, although it faces roadblocks from the United States and Canada.
The 10-year JGB yield rose 0.5 basis point to 0.970 percent , off a 14-month low of 0.935 percent hit earlier in the week.
STRONG SUPPORT
Still, many market players think the 10-year bonds have strong support around yields of 1.0 percent because not many investors have had a chance to buy 10-year bonds at better levels in the current half-year to March.
Its December high of 1.090 percent is unlikely to be hit at least until March, market players said.
"No one is willing to sell aggressively. Even 1.05 percent looks remote to me," said a fund manager at a Japanese asset management firm.
Thirty-year bonds were the worst performers, with their yield rising 1.0 basis point to 1.930 percent, as they were also smarting from disappointing sales in the secondary market after a strong auction on Tuesday.
Some market players also said the longer end of the curve is being hurt by worries that Prime Minister Yoshihiko Noda may not have enough clout to push through his fiscal reform plan centring on a two-stage hike in the sales tax.
Opposition parties, whose cooperation Noda needs to pass bills through parliament, showed no sign of compromise, with the head of the biggest opposition party calling for a snap election in a Reuters interview on Wednesday.
Some market players think a snap election without a deal on the tax hike could raise uncertainty and rattle investors, given that political instability has helped to boost bond yields in Italy in the euro zone debt saga.
"Some players may be betting on the possible dissolution of parliament. Steepening plays seem to be comfortable at least until the 20-year JGB auction next week," said Akito Fukunaga, chief rates strategist at RBS Securities.
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